Insights into Editorial: For the rich, India is as good as a tax haven

As part of a transparency drive, the government has made public direct tax data for last 15 years. However, data for individuals has been published only for 2012-13 assessment year, which shows taxes for income in financial year ended March 31, 2012.

Highlights of the data:

Taxpayers account for just about 1% of India’s population, but tax outgo was over Rs. 1 crore for as many as 5,430 individuals.

A total of 2.87 crore individuals filed income tax returns for the year 2012-13, but 1.62 crore of them did not pay any tax — leaving the number of taxpayers at just about 1.25 crore.

The tax outgo was less than Rs. 1.5 lakh for a vast majority of nearly 89% taxpayers (over 1.11 crore). Their average tax payable was just about Rs. 21,000, while the collective amount stood at over Rs. 23,000 crore.

The three individuals in the top-bracket of Rs. 100-500 crore paid a total tax of Rs. 437 crore — resulting in an average tax outgo of Rs. 145.80 crore.

As many as 5,430 individuals paid income tax of over Rs. 1 crore. Out of this, the tax range was Rs. 1-5 crore for more than 5,000 individuals, resulting in a total outgo of Rs. 8,907 crore.

The bulk of individuals who filed returns for the assessment year 2012-13 earned an annual salary between Rs. 5.5 lakh and Rs. 9.5 lakh.

Further 19.18 lakh individuals earned salary of Rs. 2.5-3.5 lakh that year. Six individuals fell in the high-end earning bracket of Rs. 50-100 crore of salary income. In the salary range of Rs. 1-5 crore, there were as many as 17,515 individuals.

These figures show that India remains a low-tax country despite the acceleration of economic growth in the past decade.

The data also reveal that income inequality has risen in the past few decades. The share of the top 1% of the population in the country in the total national income was around 10% in the 1950s, but came down to less than 4% by the end of the 1970s before steadily climbing to 7% by the end of the 1990s. By the latest estimates, this went up to 13% for 2012, the highest since independence, but also, importantly, it almost doubled in the past 15 years.

The increase in inequality has been one of the highest since independence and is much more than in any other country with a comparable per capita income or among developed economies. This also shows the inability of the state to tax the rich more.

This has also contributed to a worsening fiscal situation by increasing exemptions, subsidizing the wealthy and through various tax giveaways.

The data also indicate that India is the country with the lowest tax-to-GDP ratio among countries with a similar per capita income on a purchasing power parity basis. It is also the country with the lowest expenditure-to-GDP ratio. Expenditure on essential public services such as agriculture, nutrition (Integrated Child Development Services, mid-day meals), education and health has been substantially cut.

What’s the problem?

Successive governments at the centre have failed to tax the rich considerably. The problem has been aggravated by subsidies provided to the rich. Clearly, the subsidies to the rich are not only bad on the equity principle, but are also hurting the capacity of the government to spend more on essential sectors such as health and nutrition and education. Due to this, not only has our expenditure on a per capita basis on these sectors been among the lowest, but has also remained stagnant for the past two decades.

India’s tax-to-GDP ratio is also not picking up. The current tax-to-GDP ratio of around 16.8% is roughly the same as it was at the beginning of economic reforms in 1991. The primary reason for the low tax collection has been the low tax base, as admitted by the finance ministry in the economic survey. The Indians who pay tax account for only 2% of the population. This is not only low compared to the ratio of voters in an economy but also low compared to the quantum of high-value transactions.

What’s the solution?

As recommended by the Economic Survey, bringing more people into the tax net through some form of direct taxation will help. In some instances, higher tax rates can also be considered by the government. Experiences of developed countries can be considered here. Most of post-war Europe and other developed countries had an effective tax rate higher than 60% during the time their economies were being built after the war. On the other hand, India continued to lower tax rates not just on personal income but also on corporate entities, with the finance minister recently announcing a reduction in the corporate tax rates to 25% from the existing 30% by 2019.

Conclusion:

The approach of the government in the past few years regarding tax collection has not been very impressive. Overall, this has largely affected the poor in the country. Hence, it is high time for the government to take up the matter seriously and address the issues concerned.